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Permian Basin producers turn to private builders for electric infrastructure

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To keep the pumps running, oil and gas companies in the Permian are turning to private companies for electric infrastructure.

Source: Associated Press

Oil and gas companies are turning to alternative providers to meet their growing needs for electric infrastructure in the Permian Basin, building so-called microgrids to serve unprecedented load growth in the West Texas oilfields.

Electric substations are a key part of this infrastructure, and builders of those substations have caught the attention of the Public Utility Commission of Texas. In April 2018, regulators opened a docket to consider requiring both utilities and other companies to apply for a certificate of convenience and necessity prior to construction, a potentially lengthy process that could contribute to delays and costs in getting power to the market. Chairman DeAnn Walker questioned the need for some new infrastructure, and the commission held hearings in October 2018 about the potential rule changes.

Walker on Feb. 7 nixed the proposal after widespread opposition, particularly from oil and gas companies operating in the Permian Basin, where peak electricity demand has grown 8% a year since 2012, compared with 2% system-wide growth in the grid operated by the Electric Reliability Council of Texas.

The commissioners have since opened a new docket investigating whether to require more public transparency around new electric infrastructure. No action has been taken yet. (PUCT Control No. 49199)

'We'll just do it private'

Any company in Texas, including ones that are not classified as utilities, can build a substation for its own use without PUCT approval. The PUCT does not track how many private substations have popped up in the state, commission spokesman Andrew Barlow said.

"A company can also build a substation for another company and be paid for doing so," Barlow said in an email. "However, it can't retain ownership of the substation and be paid by the other company for providing service to that substation; only a utility can do that."

Oil and gas operators are finding that companies that are not subject to state regulations — which require utilities to demonstrate a need for infrastructure are able to fulfill infrastructure needs more quickly than regulated utilities.

Substations can be expensive to build. Depending on the size, one could cost from $700,000 to more than $10 million, excluding the costs of land, according to the Permian Basin Petroleum Association and a spokesman for Xcel Energy Inc., which, through its utility subsidiary Southwestern Public Service Co., serves portions of the Permian Basin in Texas outside of ERCOT and in southeastern New Mexico. The association, citing power needs in West Texas, opposes new regulations that would make it more difficult to build the infrastructure.

And many companies believe the infrastructure investments will pay off. John Bick, managing principal of Priority Power Management, a Texas-based energy services firm, said that when power demand in the Permian began surging in 2012-2013, utility companies "couldn't get our oil and gas customers the capacity they needed to run the operations."

"We knew how to build private, utility-grade infrastructure, and said, 'We'll just do it private,'" Bick said.

So the company, founded in 2001, got into the substation business. Last year, Priority Power Management built around 20 private substations, he said, and demand remains brisk this year.

"The load is real; there's a real need out there," Bick said. "And if the utilities can't do it in a timely manner, then you're going to continue see these private substations develop."

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At the same time, utilities are investing heavily in infrastructure in the region. Xcel Energy has built more than 30 substations in Texas, New Mexico and Oklahoma since 2011 as part of its ongoing Power for the Plains project, a $3 billion transmission expansion effort. Under the effort, at least 40 substations have been upgraded, while another 27 will be built or upgraded through 2021, according to the company. American Electric Power Co. Inc. and its subsidiary AEP Texas Inc. are also among the companies partnering in transmission projects to expand service in West Texas.

"In general, we have sufficient substation capacity and are keeping up with growing demand," Xcel Energy spokesman Wes Reeves said in an email.

But, he added, many customers "find it advantageous to build their own substations and take service directly from our transmission system," allowing them to buy power at a cheaper rate.

"In these cases, we are not involved in building the customer's substation infrastructure," Reeves said.

There are at least 3,498 substations in Texas, according to the PUCT, which does not provide location-level data. At least 300 of those substations have been built within the past five years, the commission said. This includes those owned by investor-owned utilities both inside and outside the ERCOT market, as well as cooperatives and municipal utilities.

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There are 83 substations operating the Permian Basin, according to S&P Global Market Intelligence data. Eleven substations are in some phase of development in the region.

The data is sourced primarily from Federal Energy Regulatory Commission filings and includes substations associated with transmission lines of at least 115 kV and longer than 10 miles.

Ben Shepperd, president of the Permian Basin Petroleum Association, said in an interview that the need for power infrastructure is particularly acute in the Delaware Basin, which straddles the Texas-New Mexico border. According to S&P Global Market Intelligence data, that is where much of the substation development is occurring.

"Because our production and our development footprint is expanding rapidly in the western part of the Permian, we have kind of overrun the runway in some respects," Shepperd said. "And so it is a question of needing additional substations. It's also bringing more wire for transmission to get to more rural places; we're drilling in places where we haven't been drilling before."

Additional infrastructure in rural areas of West Texas could also serve as a boon for renewable energy generation. Estimating that there are 34,000 MW of solar capacity in the ERCOT interconnection queue, Joshua Rhodes, a research associate at the University of Texas at Austin's Energy Institute, said that new power infrastructure in the Permian Basin could outlast the current oil and gas boom.

"It might be good to look at post-oil implications for that infrastructure," he said. "If the substations get built, they can accept power from other resources out there."